Thursday, October 19, 2017

Growing U.S. Shale Activity Confounds OPEC

Posted by May 17, 2017

File Image (CREDIT: AdobeStock ? (c) shamtor)

As oilfield workers for Lilis Energy Inc threaded together drill pipes one recent morning in the Permian Basin, a bulldozer cleared sagebrush to make way for the company's fifth well since January.
 
Lilis aims to expand production sevenfold this year in America's most active oilfield.
 
The whir of activity is all the more impressive after the small firm nearly collapsed in late 2015 - amid unrestrained production from the Organization of the Petroleum Exporting Countries (OPEC). As per-barrel prices plummeted, Lilis piled on debt and struggled to pay workers.
 
Now - with prices higher after a November OPEC decision to cut output - Lilis can't grow fast enough.
 
Such resurrections are common these days in the Permian, which stretches across West Texas and eastern New Mexico. They tell the story of the U.S. shale resurgence and the quandary it poses for OPEC as it struggles to tame a global glut.
 
Surging U.S. production has stalled OPEC's effort to cut supply. Inventories in industrialized nations totaled 3.05 billion barrels in February - about 330 million barrels above the five-year average, according to the International Energy Agency.
 
The Permian boom will be high on the agenda as OPEC oil ministers begin gathering in Vienna ahead of a May 25 policy meeting to decide whether to extend output cuts.
 
In the long term, too much U.S. output could spur OPEC to open the spigots again - setting off another price war - but for now its member nations' need for revenue makes that unlikely.
 
On Monday, the world's top two oil producers - OPEC heavyweight Saudi Arabia and Russia, a non-OPEC nation - said they had agreed in principle on the need to continue output cuts for an additional nine months, through March 2018.
 
That would extend the initial agreement, which took effect in January and reduced production by 1.2 barrels per day (bpd) from OPEC nations and another 600,000 bpd from non-OPEC producers, including Russia.
 
The pledge to extend cuts marked an evolution in the thinking of Saudi Arabia Oil Minister Khalid al-Falih - in response to surging U.S. output.
 
After OPEC's decision in November, Al-Falih expressed confidence that no further supply curbs would be needed because of rising demand.
 
Then in March, Al-Falih told a Houston energy conference that the "green shoots" in U.S. shale might be "growing too fast" - and warned there would be no "free rides" for U.S. producers benefiting from OPEC production cuts.
 
But by last week, Al-Falih vowed OPEC would do "whatever it takes" to control oversupply.
 
Unlike OPEC nations, U.S. firms are barred by anti-trust laws from colluding to control output or prices, leaving market demand as the only check on production.
 
"I'm really proud American production is offsetting those OPEC cuts," said Lilis Chief Executive Avi Mirman.
 
FREE RIDE ON OPEC CUTS
Now it appears the free ride for U.S. shale producers will continue at least into next year.
 
U.S. oil output has jumped to 9.31 million bpd this year, up 440,000 bpd from 2016, according to U.S. Energy Information Agency estimates.
 
About a quarter of that production comes from the Permian, where broad-based growth comes from small firms like Lilis, global majors including Exxon Mobil Corp and large independents such as Parsley Energy Inc.
 
OPEC's two-year price war sank hundreds of companies and forced majors including Exxon and Chevron Corp to retrench - but it also and stirred their interest in shale.
 
Exxon paid nearly $7 billion in February to double its acreage in the Permian.
 
Earlier this month, about 20 miles (32 km) south of Midland, Texas - the center of the basin's industry - a crew from ProPetro Holding Corp was hydraulically fracturing, or fracking, an Exxon well.
 
Silver silos held 18 million pounds of sand, which would be mixed with 22 million gallons of water and forced into the well, unlocking oil trapped in rock.
 
"We're really approaching the Permian as a major project," Sara Ortwein, president of Exxon's shale-focused subsidiary, XTO Energy, said in an interview.
 
Across the Permian, the number of rigs this year has risen 30 percent and the number of fracking crews has jumped 40 percent, according to Primary Vision, which tracks oilfield service equipment usage.
 
That won't change soon, said Mark Papa, CEO of Centennial Resource Development Inc, which added to its Permian land holdings this month with a $350 million deal.
 
"A disproportionate amount of U.S. production growth between now and the end of the decade will come from the Permian," Papa said in an interview.
 
'WE'RE OUT OF RIGS'
In a reversal from the thousands of layoffs here in 2015, oil companies are hiring briskly.
 
Fracking service provider Keane Group Inc, for instance, has plans to hire at least 240 workers this year.
 
For the growth to continue, however, prices will have to rise for rigs and other services, executives and analysts have said.
 
Paul Mosvold, president of drilling contractor Scandrill Inc, has more business than he can handle.
 
"We're out of rigs," he said. "We have been since January."
 
But he won't add more rigs unless producers pay more - maybe $25,000 per day, instead of the current $15,000 to $19,000. That may depend on per-barrel prices going up, an unlikely prospect amid expanding supply.
 
Oil drillers, meanwhile, continue to hunt for new cost-cutting technologies - after already halving the cost of extracting a barrel since 2014.
 
Parsley is cutting labor costs with sensors on wells that transmit production and maintenance data to its headquarters in Austin, Texas.
 
"We're constantly getting more efficient," Mark Timmons, Parsley's vice president of field operations.
 
The Lilis revival started last year with debt-for-equity swaps and a merger with another troubled oil producer, giving Lilis access to Permian acreage.
 
The company's market value has risen to $210 million from about $3 million two years ago.
 
At the company's newest well site, Lilis CEO Mirman checked drilling progress on his iPhone and shrugged off any worries about OPEC’s next move.
 

"We're using every tool at our disposal to grow," he said. 

 

By Ernest Scheyder
 

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